NEW YORK, Dec 7 US Airways Group Inc has
made a formal merger proposal to American Airlines parent AMR
Corp and its creditors that could value the combined
airline at around $8.5 billion, two people familiar with the
matter said on Friday.

Details of the proposal emerged as American Airlines pilots
voted to ratify a new union contract on Friday, ending a
years-long labor dispute and stabilizing the carrier as it tries
to emerge from bankruptcy.

Under an all-stock merger that US Airways proposed in
mid-November at a meeting with AMR's unsecured creditors
committee, AMR creditors would own 70 percent of the merged
company and US Airways shareholders 30 percent, the people said.

US Airways and AMR are negotiating toward a potential merger
agreement that the smaller rival hopes could come as soon as
January, one of the people added, asking not to be named because
the matter is not public.

The combined AMR and US Airways could have a value similar
to Delta Air Lines Inc, which has a market
capitalization of around $8.5 billion, the person said.

At the same time, AMR is still pursuing a plan to emerge
from bankruptcy proceedings as an independent airline, which
will be compared against the merits of a merger with US Airways,
the people said.

The companies have yet to narrow differences on a number of
significant issues before any deal could be agreed, including
how much of the combined carrier each side should own, the
people said.

AMR creditors think they should get an equity stake of
closer to 80 percent in a merged entity, rather than the 70
percent proposed by US Airways, the people said. AMR and US
Airways also disagree on potential cost and revenue benefits
from a merger as well as labor integration challenges, they
added.

In a note to American Airlines workers, AMR CEO Tom Horton
said the company is weighing whether a merger could "create
value for our owners and a positive outcome for our people and
our customers. We expect to have a conclusion on this soon."

Representatives of US Airways and the creditors committee
declined to comment. The Wall Street Journal reported details of
US Airways' proposal earlier on Friday.

NEW AMR PILOTS DEAL

The new labor contract, approved by nearly three-quarters of
the AMR pilots who voted, gives the Allied Pilots' Association a
13.5 percent equity stake in AMR and offers what the union sees
as a path to "industry-standard" pay, union spokesman Dennis
Tajer told Reuters.

AMR filed for bankruptcy in November 2011, primarily due to
high labor costs, and said it needed to cut those costs by $1
billion a year. It achieved concessions from its ground workers
and flight attendants but remained at odds with pilots in bitter
labor talks that date to 2006.

AMR creditors had deemed labor peace a major priority,
saying uncertainty over contracts could make it difficult for
creditors and potential investors to assess the company's
post-bankruptcy viability.

Friday's vote could be seen as addressing that concern and
providing AMR a clearer path toward exiting Chapter 11.

The pilots had been working under strict labor terms imposed
unilaterally by AMR as part of its bankruptcy process while
negotiations dragged on. The pilots struck down a previous
contract offer in August, which at the time AMR had framed as
its "last, best" offer.

How the company will look when it exits bankruptcy is still
unclear. The pilots' union says it has lost faith in AMR
management, led by Horton, and strongly supports a US Airways
takeover.

"This ratified agreement should not in any way be viewed as
support for the American standalone plan or for this current
management team," Tajer said. "This contract represents a bridge
to a merger with US Airways."

At least one large group of bondholders, including JPMorgan
Chase & Co, Pentwater Capital Management and York
Capital Management, has expressed interest in providing an
equity infusion to fund AMR as a standalone entity.

The group was strengthened recently when other significant
stakeholders, including Marathon Asset Management, joined forces
with it, according to court papers filed by the group on
Thursday.

The case is In re AMR Corp et al, U.S. Bankruptcy Court,
Southern District of New York, No. 11-15463.

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